A clear signal has been sent to the market that interest rates will not be used to manage rupee depreciation at this point of time, but only to fight inflation and there is a complete consensus, said Rathin Roy, Director, National Institute of Public Finance and Policy and member of the Prime Minister’s Economic Advisory Council.
He was in conversation with S. Krishnan, Principal Secretary to Government of Tamil Nadu, on the topic ‘Depreciating rupee: an economic weakness?” organised by the Chennai International Centre here.
Dr. Roy pointed out that rupee depreciated 4-6% each year and it had not been volatile despite the fall in recent months. He pointed to some major factors for the current fall. For one, the U.S. economy was growing at levels at which normally only emerging economies grew, which had pushed investors to allocate more money to the U.S.
Another factor was the rise in import bill due to surge in oil prices, leading to demand for dollars, Dr. Roy added. As a result, he pointed out, speculators and financial players might try to short the rupee, anticipating it to fall.
Less of shorting
However, he said shorting happened relatively less in the current scenario because the government in the last two years had clearly conveyed it was committed to using the reserves to prevent volatility in the foreign exchange market. He said the government and the RBI had been tackling the situation well with the available tools.
